Ebullio exits physical metals

Mon Sep 2, 2013 11:30am EDT

* Ebullio can not afford inflated costs of buying metals

* Move follows US probe into bank, trade house metal firms

By Maytaal Angel and Eric Onstad

LONDON, Sept 2 (Reuters) - Hedge fund Ebullio Capital Management says it has exited physical metals trading after struggling to compete in a market dominated by big banks and trade houses, which are facing U.S. regulatory scrutiny of their metals business.

A drought in financing for metals trading since the global financial crisis has also slashed profits, Lars Steffensen, executive managing partner of British-based Ebullio, told Reuters.

"It's a market that's been sown up by banks and trade houses, and others can't operate. That's ok, that's business, but we can choose not to be in that business," said Steffensen.

The Ebullio group, which has about $250 million in assets, was planning to wind down its physical metals trading fund when a dispute with commodity trader Noble Group Ltd resulted in the liquidation of the fund, Steffensen said.

Noble was not immediately available for comment.

The fund, which used to be Ebullio's flagship, could previously earn an annual 80 percent return on a typical copper deal, but that margin is now 1-2 percent, said Steffensen.

"Today because of low interest rates and ownership of warehouses by banks and trade houses, it's become impossible to obtain metal in the spot market outside of warehouses - or you have to pay very high premiums, so it's prohibitive."

Goldman Sachs, JP Morgan and Glencore-Xstrata are fending off a barrage of U.S. lawsuits accusing their warehousing subsidiaries of hoarding metal and artificially inflating prices.

The matter has also been put before the U.S. Senate, while both the Commodity Futures Trading Commission and the U.S. Department of Justice have begun preliminary probes into their metals warehousing business.

The unprecedented scrutiny follows years of complaints by aluminium consumers about inflated prices and logjams at warehouses resulting in lengthy queues to obtain metal.

Steffensen said his 80 percent profit on copper trading was based on having a bank financing the deal and Ebullio putting up 10 percent in collateral.

But without bank finance, Ebullio would have to finance the entire transaction, slashing the profit margin to 8 percent. The warehouse queues and resulting high premiums have further shrunk margins down to 1-2 percent a year, he said.

Ebullio has had success in shifting to trading commodity futures - its new flagship Far East Commodity Fund jumped 55.05 percent last year and gained 16.46 percent in August.

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